Economic feasibility
Economic feasibility is the analysis of the different costs and benefits of implementing the new system. It also assesses the relative importance of the new system in the comparison with other proposed systems . We will start by looking at different methods for assessing costs and benefits and then go on to look at how critical success factors and KPIs are devised during initiation as part of benefit identification to help align the outcomes of the project with business needs.
Assessing costs and benefits
Assessing costs and benefits of IS is not an exact science. A fundamental problem is that it is not easy to measure each benefit and cost accurately. Even where the benefits and costs are quantifiable, the figures used are only based on an estimate predicting several years into the future. This section outlines how cost–benefit analysis occurs at the start of a project to implement a new BIS. All feasibility assessments for information systems development should include a cost– benefit analysis. Although this may seem obvious, some companies miss out this stage because other factors are driving the development such as the need to counter a competitor threat or respond to customer demand. The creation of e-commerce systems by banks is an example of this – here the cost of setup and maintenance may be greater than the revenue achieved through increased sales. The marketing manager may, however, want to proceed with such a strategic initiative to gain first-mover advantage as explained above and to gain experience aimed at ensuring success in the future when this form of channel becomes more widely used.
The business analyst undertaking a cost–benefit analysis will identify both tangible and intangible costs and benefits. When a cost or benefit is tangible, it is possible to set a definite numeric value against an item such as the cost of installing a new network. It is not possible to place a numeric value on intangible costs and benefits. Note that for some factors it may be difficult to establish whether the benefit is tangible or intangible. For example, although it is difficult to measure the benefit of general improvements in data quality, it would be possible to measure specific aspects of quality such as the time the new system takes to deliver information to the users. Tangible costs are a measure of cost that can be calculated for each item of expenditure on BIS. For example, the purchase price of new hardware needed to run new software is a tangible cost. A monetary value cannot be placed on an intangible cost: the disruption and possible user resistance that will occur due to implementing a new system will have an effect on overall company performance, but they are difficult to measure.
A definite measure of improvement can be calculated for each tangible benefit. A reduction in cost per transaction system is an example of a tangible benefit for an online bank. It is not possible to measure an intangible benefit. For example, the improved decision-making capability provided by a decision support system would be difficult to cost.
Assessing costs
A range of costs must be included in the feasibility study. These include:
Assessing costs and benefits
Assessing costs and benefits of IS is not an exact science. A fundamental problem is that it is not easy to measure each benefit and cost accurately. Even where the benefits and costs are quantifiable, the figures used are only based on an estimate predicting several years into the future. This section outlines how cost–benefit analysis occurs at the start of a project to implement a new BIS. All feasibility assessments for information systems development should include a cost– benefit analysis. Although this may seem obvious, some companies miss out this stage because other factors are driving the development such as the need to counter a competitor threat or respond to customer demand. The creation of e-commerce systems by banks is an example of this – here the cost of setup and maintenance may be greater than the revenue achieved through increased sales. The marketing manager may, however, want to proceed with such a strategic initiative to gain first-mover advantage as explained above and to gain experience aimed at ensuring success in the future when this form of channel becomes more widely used.
The business analyst undertaking a cost–benefit analysis will identify both tangible and intangible costs and benefits. When a cost or benefit is tangible, it is possible to set a definite numeric value against an item such as the cost of installing a new network. It is not possible to place a numeric value on intangible costs and benefits. Note that for some factors it may be difficult to establish whether the benefit is tangible or intangible. For example, although it is difficult to measure the benefit of general improvements in data quality, it would be possible to measure specific aspects of quality such as the time the new system takes to deliver information to the users. Tangible costs are a measure of cost that can be calculated for each item of expenditure on BIS. For example, the purchase price of new hardware needed to run new software is a tangible cost. A monetary value cannot be placed on an intangible cost: the disruption and possible user resistance that will occur due to implementing a new system will have an effect on overall company performance, but they are difficult to measure.
A definite measure of improvement can be calculated for each tangible benefit. A reduction in cost per transaction system is an example of a tangible benefit for an online bank. It is not possible to measure an intangible benefit. For example, the improved decision-making capability provided by a decision support system would be difficult to cost.
Assessing costs
A range of costs must be included in the feasibility study. These include:
- hardware and software purchase costs;
- systems development staff costs if a bespoke or tailored solution is chosen
- installation costs including cabling, physically moving equipment and bringing in new furniture to house the computers;
- migration costs such as transferring data from an existing system to the new system or running the new and original systems in parallel until the reliability of the new system is established;
- operating costs including maintenance costs of hardware such as replacing parts or upgrading to new versions of software. Staff costs in maintaining the hardware and software and trouble-shooting any problems must also be factored in. Operating costs may also include an environmental audit of the amount of energy and consumables used;
- training costs;
- wider organisational costs, for example redundancy payments, may need to be made if computerisation leads to loss of jobs.
Note that these costs include not only the initial cost of purchase, but also the ongoing maintenance costs. These are considerable for information systems and will often exceed the initial cost of purchase. It is worth noting that there is a growing realisation that the cost of ownership of a software or hardware product is potentially much higher than the purchase cost. This is mainly due to the cost of trouble-shooting software bugs and hardware faults, phone support, installing upgrades and paying for support and/or upgrades from the vendor. The cost of ownership of the selected software and hardware combination should obviously also be factored into your cost–benefit analysis. The cost of training and education and documentation of staff should also be included with standard development costs of paying analysts and programmers.
Assessing benefits
While information systems costs are relatively easy to identify, the benefits are harder to quantify since they are often intangible and will occur in the future. Benefits from a new system can be considered in terms of improvements to business processes and the quality of information used to support these processes. Common benefits include reduced costs of operating processes and greater efficiency leading to faster completion of tasks such as serving a customer.
Parker and Benson (1988) recommend a structured approach to identifying tangible benefits. This involves considering the cost of performing a business process before introduction of a new system and comparing this to the cost after implementation. Costs may include staff time, materials and equipment. This result will indicate either a tangible benefit through cost reduction or an added cost of using the new system. Intangible benefits will include improvements to the quality of information, as described earlier . A new information system should enable information quality to be improved in some of the following ways:
- improved accuracy;
- improved availability and timeliness;
- improved usability (easier to understand and then act on information);
- improved utilisation;
- improved security of information.
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